Toro Co (TTC) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Toro Company first-quarter earnings conference call. My name is Janeda, and I will be your coordinator for today.At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference.(Operator Instructions)As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Kurt Svendsen, Director of Investor and Public Relations for the Toro Company. Please proceed, Mr. Svendsen.

Thank you, Jeneda, and good morning, everyone. Joining me this morning for our first-quarter earnings call are Mike Hoffman, Chairman and Chief Executive Officer; Steve Wolfe, Chief Financial Officer; and Tom Larson, Vice President and Treasurer.

Let me now begin with our customary forward-looking statement policy. Please keep in mind during the call we will make certain forward-looking statements which are intended to assist you in understanding the Company's results. You are all well aware of the inherent difficulties, risks and uncertainties in making predictive statements. So the Safe Harbor portion of the Company's earnings release, as well as SEC filings detail some of the important risk factors that may cause actual results to differ from those in our predictions. Our earnings release was issued this morning by Business Wire, and can also be found in the Investor Information section of our corporate website, TheToroCompany.com.

With that, I will now turn the call over to Mike.

Thank you, Kurt, and good morning, everyone. I'm not sure whether some of you happened to catch the Wall Street Journal article earlier this month regarding our favorite weather prognosticator, Punxsutawney Phil. If you recall, the groundhog did not see his shadow, signaling an early spring. So given Phil's prediction, and remember our Safe Harbor commentary, the article suggested what stocks might make his portfolio taking a long position on lawn care companies.

Of course, we were pleased to see Phil's trust in Toro. It's probably hard for many to believe spring is just around the corner with record snowfalls blanketing much of the country. Here in Minneapolis, for example, winter kicked off early with enough snow to bring down the roof of the Metrodome. And earlier this month, we saw a massive snowstorm that buried Chicago and other locales under nearly two feet of snow and spread as far south as Texas, site of this year's Super Bowl. Some of you know, Toro has a long-standing relationship with the Super Bowl that dates back to the inaugural game in 1967. We were proud once again to support the NFL grounds crew with equipment and people to help repair the game field at Cowboy Stadium.

Turning to the first quarter, we are certainly off to a good start. Snowfall in most major snow markets around the world drove great retail sales of our snow products, leaving field inventories in excellent shape for next season. But the real story is the ongoing recovery of our professional businesses. Orders are growing at a healthy rate, driven by improved market conditions and excitement around a strong line-up of new products. All in, customers today seem more confident than this time last year, which is translating into early buying activity.

As reported in this morning's earnings release, net sales for the quarter were up almost 16%, led by strong contributions from all professional businesses. Profits are also in a growth mode with earnings per share increasing 66%. Steve will discuss our financial and operating results in more detail later in the call.

Speaking of growth, we continue to invest in opportunities to extend our business in strategic adjacencies, and better support demand in emerging markets. In January, we announced the acquisition of Unique Lighting Systems, a leading manufacturer of professionally installed landscape lighting for residential and commercial use. For Toro, this represents an entirely new category for additional revenue generation, and provides significant cross-over with our irrigation business in channel relevance and customer base.

These products are installed by professional contractors, are also sold by the same distributor partners that carry Toro and Irritrol precision irrigation technologies. We see future growth in the landscape lighting markets through leveraging Toro's expanded channel placement and expertise in control technologies, as well as the opportunity to innovate in a whole new arena.

Another announcement to which we briefly alluded to last call was the development of a new micro-irrigation manufacturing plant in Eastern Europe. We're about to break ground on this facility, which will be located in Romania. This important strategic investment positions Toro closer to the expanding agricultural market in Eastern Europe, provides added capacity to support demand in the region, and creates operational efficiencies to strengthen our growth and profitability. We have a leader on the ground in Romania working closely with our Toro team, and expect the initial production to begin later this year. This project will have benefit for us in fiscal 2012.

Now I'd like to shift gears for a minute, and provide an update on key headlines within our markets, starting with residential. Within the snow category, which is a relatively small but important part of Toro's business, record snowfalls in major markets around the world, coupled with good mix of products fueled strong demand for our popular single-stage, two-stage and electric snow models. With many consumers having difficulty finding product, we leveraged our lean and flexible manufacturing systems to extend production into January, and have been working with channel partners to move inventory across North America to high-demand areas. The field pipeline at the end of January was lower than the same time last year, and we are taking share in the snow category.

Looking ahead to spring, we are very encouraged by the early customer response to our new line-up of Zero Turn Riding Mowers. This includes the innovative TimeCutter SS with Smart Speed control. Early selling at dealers has been extremely positive. As for our largest retail partner, they will carry this all new line-up of Toro Zero Turn Riders with enhanced features at the same price points as last year.

Turning to golf, the US golf market is showing signs of further improvement. While new course development outside the US also continues to grow. Equipment shipments are up over last year, with more early quoting activity. For golf irrigation, sales grew nicely as we captured many course renovation projects here in the US, as well as new golf course installations around the world.

We had the pleasure of connecting with many of our distributor partners, and golf course superintendents, architects and owners last week at the annual golf industry show in Orlando. Generally, they are more optimistic in the economic recovery than last year, and recognize they can no longer put off replacing equipment after staying on the sidelines the past couple of years. We have talked about fiscal 2011 having the highest percentage of new products in the last decade, which was evident at the show. We premiered the electric hybrid TriFlex Riding Greens Mower to great reception. This much-anticipated machine is completely new from the ground up, and slated for production in May.

Other products gaining attention, the Industry's first lithium-ion battery-powered eFlex walk Greens Mower, and the heavy duty Reelmaster 7000 fairway and rough mower, which some superintendents have now named "The Beast" for its amazing power and performance. On the irrigation side of the golf business, the innovative Lynx central irrigation control system with integrated Turf Guard wireless soil sensors is helping Toro increase project share in that arena.

Moving to the landscape contractor and grounds category, although historically one of the slower retail periods of the year for our landscape contractor business, several factors are contributing to our customers' optimism. One, the winter's strong snowfall kept landscape and general contracting companies busy, providing a higher amount of revenue and profit to purchase mowing and maintenance equipment come spring. Another positive factor is our excellent line-up of new products to drive growth in the landscape contractor category.

As for municipalities, the winter weather is putting significant pressure on already cash-strapped cities and states. As a result, these customers are seeking innovative solutions to do more with fewer resources. While we anticipate this market to be flat, many of our recent product introductions, like the Groundsmaster 360 rotary mower, and the water-saving precision spray irrigation technology, have us well positioned to take share.

For our residential and commercial irrigation business, I recently attended a key distributor meeting in California where many of our customers commented on the growing momentum behind our Toro and Irritrol brands. This is due to an unprecedented level of innovation, now coupled with greater consistency and quality. We know commercial and residential construction activity will continue to be soft, but our focus remains on growing the business and advancing our position in precision irrigation, not just in residential and commercial irrigation, but also in the golf and agricultural markets.

I will now turn it over to Steve to review our financial results for the first quarter.

Thanks, Mike. Good morning to everyone. Let me start with a summary of our financial results. As Mike mentioned earlier, net sales for the quarter increased by nearly 16% to $383.2 million, driven by strong gains across all professional businesses. On the earnings front, we delivered net income of $17.3 million, or $0.53 per share compared to $0.32 last year.

Now to our segment results, starting with professional, where worldwide sales were up 21.4%, to $258.3 million. Across all businesses, shipments were higher on improved customer optimism and successful introduction of new products. Golf projects around the world, particularly Asia, accelerated demand for golf equipment and irrigation systems. Orders for landscape maintenance products were up to dealers in anticipation of a strong selling season.And sales of micro-irrigation products grew on increased production capacity, and strong demand in the US and Eastern Europe. Net earnings in the professional segment totaled $37.9 million, up 46.9% over last year. The earnings improvement was driven largely by increased sales volumes, margin expansion, and the leveraging of SG&A expenses.

Turning to the residential segment, worldwide sales for the quarter increased 5.6% to $123.3 million. Shipments of riding products were up significantly due to growing consumer confidence and positive response to a new line-up of Zero Turn Mowers. Worldwide shipments for snow products were up due to significant snowfalls and expanded placement at a key retailer. These gains were somewhat muted by lower sales of Pope branded irrigation products in Australia due to the recent flooding, and the timing of Walk Power Mower shipments closer to retail. Net earnings in the residential segment totaled $11.4 million, down 15.3% from last year.Earnings were impacted by special warranty expense booked in the quarter, as well as unfavorable product mix and higher material costs.

Now to our key operating results. For the quarter, gross margin expanded 60 basis points to 35.7%, driven by overall favorable product mix primarily from increased professional sales, and improved plant utilization on higher volumes. These gains were somewhat squeezed by rising raw material costs, namely steel, resin, copper and rubber. We expect commodity prices to remain high for the duration of the year, as suppliers face capacity issues due to rising demand. For Toro, we are actively engaged in mitigating these increases by working closely with our suppliers, and through ongoing product design initiatives. Going forward, we expect gross margin to remain flat to slightly improved.

SG&A expense for the quarter further declined as a percent of sales by 60 basis points on increased leverage across larger sales volumes, which was somewhat impacted by higher warranty expense. Looking ahead, we expect improved SG&A leverage for the year. Interest expense declined slightly for the quarter comparison due to lower average debt levels.

Our effective tax rate for the quarter was 29.3% compared to 33.6% last year. The reduction in our tax rate was mostly the result of the retroactive reinstatement of the Federal Research and Engineering tax credit. Going forward, we expect our tax rate to be about 33% to 33.5% for the full year.

Turning now to the balance sheet, accounts receivable for the quarter was up slightly on higher sales volumes. Net inventories were up $48.7 million, or 25.5%. While Toro inventories grew in anticipation of improved demand across most product lines, the field remains in great shape. As a result of increased production at manufacturing facilities, and the impact of our supply chain initiative, trade payables were favorable by up $40 million, or 36.6%. That wraps up the results for the quarter.

I'll now turn the call back to Mike for some concluding comments.

Thank you, Steve. As mentioned earlier, we are very encouraged by our start to the year. Customers are buying sooner this season on improved confidence and a sustained economic recovery. We anticipate this momentum to continue with the strong line-up of innovative new products, which we expect to drive demand and account for over half of our revenues this year.

While the frequent snow has been good for our business, Mother Nature will hopefully help us keep the current momentum as we move into the spring and summer season with early favorable spring weather. Therefore, we now expect fiscal 2011 net earnings to be about $3.40 per share on a revenue increase of approximately 7%. For our second quarter, we expect to report net earnings of about $1.58 per share.

As we look toward our 100th anniversary in 2014, I'm pleased to share with you our new Employee Initiative that will guide us through the next four years and into our next century. 2001, we embarked on Five-by-Five, the first of a series of initiatives that included Six-plus-Eight, Grow Lean, and Five-in-One, all of which helped engage our employees, advance key enterprise goals, and bring us to where we are today. These initiatives have contributed to our becoming a clearly stronger company than we were a decade ago.

Destination 2014 is the name of our new initiative, themed around space travel and rockets. We launched the initiative to employees earlier this week as the management team dressed in NASA preflight suits, shared the vision for the next four years and beyond. The initiative will count up to 2014 with three areas of focus, including revenue growth, operating earnings and employee engagement goals. The first engine will be an annual organic growth goal of $100 million each year over the previous year's results. The second engine includes a bold earnings goal.At the close of fiscal 2010, our operating earnings as a percent of sales stood at 8.9%. By 2014, our goal is to raise operating earnings to above 12%.

And the third engine is the employee engagement area, and it will focus on the importance of relationships, innovation and excellence. We have terrific people and a great team at this Company who are committed to just that, relationships, innovation and excellence. So all in, this initiative will serve to focus us both individually and as a Company on goals that power growth and profitability, and ultimately deliver greater value to our customers and shareholders.

This concludes our formal remarks. Now let's open it up for your questions. So, Jeneda, back to you.

(Operator Instructions)Your first question comes from the line of Sam Darkatsh of Raymond James. Please proceed.

Good morning, Sam.

Good morning, Mike, Steve and thank you for the visual of you folks in space suits. I appreciate it. Three questions, if I could. First off, the taking higher of guidance for the year, and you're taking both your sales expectations higher as well as your EPS. Is that entirely due to the sales and EPS upside of Q1 perhaps with a little bit of benefit from tax, or is there also some incremental favorability in your expectations for the upcoming season?

Yes. There's a piece of all three in there, Sam. Certainly, we will benefit for the year from tax. And so you would say that was probably a little more than a third of it. A third of it is just better operating performance, if you will. As we raised revenues, just to be clear, a part of that raising revenues was the addition of the Unique Lighting and, while small and not real material, that won't be accretive the first year. It won't have a material impact. That was a little bit of a drag, but all in, I would say that as you look at the $0.20 significant portion tax, half tax, half operating, if you will.

Second question. If I take a look back, five, ten years or so in your history, specifically on a pro business, I look at the average sequential move from Q1 to Q2, it's somewhere around 58%, 60% or so incremental growth, sequential growth Q1 to Q2, which would peg your pro sales in Q2 around $400 million. Is that where we should be looking at it? Is there a reason why historical sequential growth rates wouldn't -- would or would not apply this year?

It's a very good question. Unfortunately, not one that I have an answer for you. We'll go back and look at that. Some of this will depend, for example, on the professional side as you talked, some of this will depend on the sell through landscape contractor. We had a strong sell in, in the first quarter. We've yet to see that product retail and then go through the replenishment cycle a couple of times for the year. So that remains a question mark. And, as I mentioned earlier, Mother Nature plays a role there as well.

The same thing is true on the professional golf side. So the sell in has been good in anticipation of a good retail season. That has not come to pass yet, and so -- I wish I had a better answer, say it's going to follow. The other thing I would say to you is, much of that was before our working capital initiative. We took a lot of the timing of shipment varies by the demand from the market. So, here's what we'll do. We'll go back and look at that and see if we can come up with a more enlightened answer.

You would or would not be squeamish if expectations externally were for $400 million of pro sales in the second quarter?

Yes. I really can't comment. I don't know. I couldn't say squeamish or not. It's a good question, I just don't have a good answer.

Okay. Last question, if I could. I saw, I think, $30 million worth of share repurchases in the quarter, but sequentially the share count went up. Does that suggest that you bought that stock back late in the quarter and so Q2 share count will come off a bit?

Sam, it's Steve. If you look at the press release year-over-year, shares are down two million. If you go back and look fourth quarter to first quarter, shares are down about a million. So, I'm not sure where you're getting the that shares didn't drop. We'll have to take another look at that.

Okay. I'll talk that offline. I appreciate it. Thanks much, guys.

Thanks, Sam.

Your next question comes from the line of Jim Lucas with Janney Capital Markets. Please proceed.

Good morning, guys. This is Mike (inaudible) standing in for Jim. How are you?

Good morning, Mike.

Just following up on the share buyback. So about how much is left on the authorization?

$3.8 million roughly. So we have plenty of room on authorization.

And why so much in that first quarter? Was it just to offset creep or was it --?

It's just a matter of -- we're looking at cash and how we best deploy that constantly, and the timing was such that we just bought a little more in the fourth quarter here than we had originally. Typically, we do a little more in the fourth when we're out of our working capital needs. But that's just the way it flowed for this go round.

Okay. And then in the residential, you mentioned the warranty expense. Can you go into a little bit of detail on how much that was, or how much that impacted margins there?

Yes. It's a -- we had a couple things happen to residential profitability. When you look at the numbers. First was just a mix within the consumer division, was mixed more towards less higher -- lower margin products. That's a lot of just timing and flow was more snow. We have a good rider sell-in. The Walkers were a little bit down just because of the -- taking them closer to retail. All of that mix was part of that issue.

The warranty special was with a consumer product that we had, that we had to post a one-time special accrual, we've got that under control. We have a fix in place. That was $2.5 million, roughly. So it was not an insignificant dollar amount. Then we had some commodity head wind, if you will, that hurt the profitability of the residential segment for the quarter.

And then as far as that last bit, do you expect you'll be able to offset that with pricing or productivity improvements, or what do you expect for the rest of the year?

That would be the goal, and to get the residential profitability back up to where it was, yes.

And then just I guess last is, I'm wondering about the inventories in the field. You mentioned that they look good and I'm just wondering, how do the field inventories at the distributors for both the residential and the landscape products compare versus last year and versus maybe a more normalized year a couple of years ago?

Well it's a good question, Mike. Not sure what normal is anymore. We would say this. Field inventories for residential and field inventories for our professional businesses are in excellent shape. And they're similar to where they were last year when they were also in excellent shape. As we see the business start to grow again, that will put some additional pressure on those field inventories and we'll be watching them carefully.

We have I think made great strides in our operations area and we've got a great team there that's built in more flexibility, so we can respond quicker as a result operate with a little lower level of inventory in the field and try to keep more of it here to deploy out to the field one time without having to move it around. So, while you saw our inventories go up for the quarter, that was very intentional. That was not a surprise to us. That was planned as we anticipate that the spring and being able to move those to the field which as I said when I started is in a very good position on both segments, both professional and residential.

Okay. That helps a lot. And then just fine tuning that on the residential side. You weren't caught off guard by then delaying some of this inventory build-up of the Walk Power mowers?

We were not. Again, we take kind of a long view on that, and as we work with our key partners, whether that's on the dealers' side or the -- with Home Depot to manage the timing of their shipment. The other part of that that played a role here, many of you out there have been living it, this has been -- last year was a good winter for snow. This has been a great winter for snow. And those dealers and even Home Depot have been busy longer in the snow season than they were last year. And so that slows things down a bit, too. But not so much as going to have any kind of a negative impact. The stuff will be flowing out there, now and -- in hopes that Punxsutawney was right on his prediction.

Okay, thanks a lot, guys.

Thank you.

Thanks, Mike.

Your next question comes from the line of Mark Herbek with Cleveland Research. Please proceed.

Good morning, guys.

Good morning, Mark.

Hey, Mark.

Real quick, Steve. In terms of gross margin and SG&A. I think a quarter ago you were talking about gross margin flat to up slightly, and SG&A showing modest improvement as a percentage of sales. Can you walk us through what your expectations are at this point for both gross margin and SG&A, relative to I think you framed it out as zero to 50 basis points for each a quarter ago?

Yes. Margin, we would expect to -- would be based on volume and mix and as our business mix gets back to more professional, less residential, that helps the gross margin. So we would expect that trend to continue. Also, as our sales increase, we're putting more hours through the plant. So those two things would lead to us believe that gross margin for the year should improve.

SG&A, kind of the same thing. We've done a lot of the cost cutting back in '09, and when things turned down. So we think we've got our cost base in the right place. And as sales pick up, we'll get better leverage for that. And this particular quarter, the warranty issue I mentioned, too, had to drag on SG&A. They probably would have been a little better than you saw. So, for the year, we would expect both of those pretty much what we said before to show slight improvement.

So even though you're ahead of both -- within both, you're ahead year-to-date, you don't think you can stay at the rate you were in the first quarter?

Small quarter. Again, we'll know that better when we get into the second quarter and we see where all that land. For now that's where we're going to stay.

Is your cost inflation outlook -- how much higher is your cost inflation outlook today versus 90 days ago?

Well we're going to pay more for -- if you're talking about commodities, we'll pay more for those things that I mentioned in the script. Two or three of those are key elements for us. So I think the costs will be higher. Keep in mind that a lot of our production is front-end loaded and our purchases are front-end loaded. So we've got a lot of those things behind us already.

We're still cautious because commodities can always go the other way fast, but at this point, we're feeling relatively good with the price that we put through, and we've got a 1% price increase that we put through, that we should be able to manage the commodity issue.

And then, last question. In terms of you take a look at the inventory up 25% and a lot of the positive comments in the Press Release and on the call today. Can you help us shore up the higher inventory levels, the low inventory levels in the field, and yet just call it a slight improvement to your sales outlook for the full year. Can you just help us walk through or kind of add further color on the two point increase in sales but inventory levels 25%, 26% higher, field inventory flat year-over-year?

Well as Mike -- you know Mike mentioned, the increase in our inventory was intentional. And if you think about last year, there were times during the year that the whole industry recovered faster than anyone really expected. And clearly for Toro, we had a good recovery year last year. The industry had a good recovery year and there were a lot of instances in which we could have been a better vendor in terms of delivery.

That intentional buildup that you see on the balance sheet, and it's not all -- it's $50 million, it's not all that many dollars, is to make sure that we can meet that demand as we see all these positive notes and coming back from the golf show and things Mike talked about the positives. We want to be ready for it. So we've intentionally built some inventory to make sure we can meet that demand. So that's part of our plan for the year.

And then I guess maybe, asked a different way, where do you feel better about the business today when you raise your sales slightly, where do you feel better about the business today than you did 90 days ago? Is it across the board? Is it specifically pro? Is it more US versus non-US?

We would say it's across all businesses that we have some optimism. Now having just come back from the golf show we feel particularly optimist about that, if we can say that. The feedback from customers, and customers around the world the US market is more of a replacement market and other parts of the world are more of a development market.

Golf is good. The landscape contractor business, if you will, we've had strong sell-in. You've seen that reflected in our numbers. We think those customers will have more resources to spend as a result particularly of those in the snow markets. So we feel good about that, and across the portfolio it's the new product theme. Particularly on the residential side, that's going to be a case where as we head into the season, Mother Nature will play a larger role either as a tail wind or head wind.

And so we've had relatively good springs the last couple of years, so we'll be comping against some tougher numbers there. But that's -- we're still encouraged -- depending on what weather does, we're encouraged with our lineup with our key dealers and key retailer on what we have to offer the customer. So it's, Mark, it's pretty much across the board.

And then Steve, you said 33% to 33.5% for the full year, or is that going to be the tax rate for the next three quarters?

That's for the full year.

33 to 33.5% for the full year?

Correct.

Thank you, guys.

Thank you, Mark.

Thank you.

Your next question comes from the line of Mark Rupe with Longbow Research. Please proceed.

Hey, guys. Great quarter. Good outlook. As it relates to the new four year initiative, is there any more detail on the revenue increases? Does it matter where it comes from, or do you have an idea of some subsegment or subinitiatives on kind of driving whether it's international or pro mower?

We don't. Obviously we are executing against our specific plans for each of the businesses and that will be factored into the overarching employee initiative. And what we've said is -- to the employees, and again just to be clear, this is an initiative to engage employees. We always like to share it with you guys, but it's primarily an internal one. What we have said, is this $100 million per year goal -- if one year we do $150 million the next year's goal still gets $100 million. So, cumulatively, it may be more than the $400 million.

And one of the things we did in the past couple of initiatives, we tended to blend the, if you will, the organic growth part of it with the possibility of factoring in some M&A.We've really separated that here so the organization here can very much focus on the organic growth goal. We will have -- obviously we have had and continue to have some real appetite for some non-organic growth and we will continue to work on that. But that will be independent of this initiative as we build the Company into a larger company in the future.

Okay. Perfect. And then, I don't know if you commented on it in the script, but the international performance, was clearly less than domestic. Was that Pope related, or was there something else where international is maybe lagging a little bit?

If you equalize Pope year-over-year, the international would look same-same. And so it was really the difficulties that the Australian market faced with the issues down in Brisbane, and Pope is largely irrigation. So yes that was right at the heart of it.

Okay. And then on the -- your commentary on the ZTRs, you cited the dealer channel being really excited about them. Obviously, put in strong orders for that. Then also Home Depot were your largest customer. When you think about that, is it largely an incremental slot. I know it's not at your retail customer, but from a dealer standpoint, is it replacing the existing ZTRs or is it incremental and you are expecting share gains with that, so?

We always strive for share gains, and part of that is by what product we bring, and what set of features it has, and how competitive it is in the market? We feel good about the new lineup that is now being shipped to dealers and Depot. As I said, it's a similar price point but it's more highly featured. We think it's going to be a terrific product. And as we've talked many times, that's a business for us that's a much -- it's an incremental business in that when customers come in to replace their old riding steering wheel tractor, not a business we're in, we benefit when they cross over to the Z category. Important business, growing business and one we have a very strong position in.

Perfect, thank you, guys. Good luck.

Thanks, Mark.Thanks, Mark.

And at this time, we have no further questions. I would now like to turn the call back over to Mike Hoffman for any closing remarks.

Well thank you, Jenada. And let me thank all of our listeners and our questions -- for the good questions we had today. And, as always, your interest in Toro. And we will look forward to talking with you again in May to discuss our second quarter results. So thank you. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.